Crisis, Rinse, Repeat: Key economic data from the periods following the 1929 stock-market crash and the 2007-2008 financial crisis suggest that the current recovery has been unnecessarily anemic. If policymakers refuse to heed the lessons of the New Deal era, then the next crisis is destined to be as prolonged as the last.
When the economic historians of the late 21st-century compare the Great Recession that started in 2007 with the Great Depression that started in 1929, they will write two things:
They will write that the initial policy response to the crises by the Federal Reserve and the Treasury was first rate in 2007 and after but fifth rate in 1929 after—what could have been a post-2007 repeat of the Great Depression in terms of the crash in production and employment was instead moderated to a painful episode.
But they will also write that while the post-business cycle trough policy response of President Franklin Roosevelt, the Congress elected by American voters, and the Federal Reserve was, if not first, at least second rate and laid the foundations for rapid recovery and satisfactory equitable growth; the post-business cycle trough policy response of President Barack Obama’s, the Congresses elected by American voters, and the Federal Reserve was at best third rate and did not lay foundations for rapid recovery or satisfactory equitable growth.
United States national income and national income per capita peaked in 2007 just before the Great Recessioon. Two years later, in 2009, national income per capita was 5% below its peak. Four years later, in 2013, output per capita retained its peak. And this year, 2018, if we are lucky, national income per capita will stand 8% above its previous peak of 11 years ago.
There is no comparison with the Great Depression. Four years after the business cycle peak of 1929 national income per capita was down 28% from its peak. In the great depression, output per capita did not retain its peak level for a full decade.
Thus there is no comparison with the Great Depression—save that 11 years after the pre-Great Depression Business cycle peak output for worker was 11% higher and growing rapidly, well this year output per worker is only 8% higher than the pre-Great Recession peak and growing slowly. Plotting relative performance since the peak on the same axes, this year the lines will cross. And given how much better a relative starting position policymakers had in late 2009 than Franklin Delano Roosevelt and his team had in early 1933, that is appalling.
Democrats blame Republicans for turning off the fiscal stimulus spigot in 2010 and then refusing to turn it back on. Republicans say... nothing comprehensible or coherent. They say things like:
- It must be the fault of Barack Obama, via Dodd-Frank or ObamaCare.
- Maybe it's the fault of all those people who want to work but are useless—the "zero marginal product workers".
- Anyone who does not have a job must not really want one.
There is much more truth in the Democratic assignment of blame. But not everything can be blamed on fiscal austerity. And a considerable amount of inappropriate fiscal austerity in the early stages of the recovery is properly laid at the door of Barack Obama and his team.
Most worrisome, however, is that policy during the anemic recovery is not perceived as a failure by either those at the tiller at the time or by their successors. With a few honorable exceptions, Federal Reserve policymakers tend to say that they did the best they could given the fiscal headwinds imposed on them. With a few honorable exceptions, Obama administration policymakers tend to say that they stopped a second Great Depression, and that during the recovery they did their best given how they were hobbled by the Republican congressional majorities. And Republican economists tend to either be silent or say that the policies—both fiscal and monetary—pursued by the Obama administration and by the Bernanke Fed were dangerously inflationary, and that we have been lucky to escape the fate of Greece—or Zimbabwe.
Christina and David Romer tell us that in the post-WWII period economies that run into a serious financial crisis have levels of production ten years later fully 10% lower if they had neither monetary nor fiscal policy space to deal with the crisis. We will run into a serious financial crisis: that has been the rule for modern capitalist economies since at least 1825. And there is nothing in view that suggests that, when we do, we will have both the will to use monetary and fiscal policy and the space available.